Canadian Government Debt

               A Guide to the Indebtedness of Canada and the Provinces

                                                                                    by Jared Alexander and Joel Emes

Contents

About the authors
Acknowledgments
Preface
Introduction
Total government liabilities
Unfunded liabilities of government programs
International comparison
Recommendations
Appendix A: methodology and data
Appendix B: debt tables
Appendix C: statistical summaries
Appendix D: debt ranking
Appendix E: recommended readings
References

Critical Issues Bulletins are published from time to time by The Fraser Institute (Vancouver, British Columbia, Canada) as supplements to Fraser Forum, the Institute's monthly periodical. Critical Issues Bulletins are comprehensive studies of single issues of critical importance for public policy.

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Copyright(C) 1998 by The Fraser Institute
Date of Issue: May 1998
Printed in Canada

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About the authors

Jared Alexander worked as a student intern at The Fraser Institute in the summer of 1997, where he collected much of the data and assisted in the writing of this publication. Since then, he has been doing research and writing for projects in health-care policy at the Institute. He is currently completing an Honours Bachelor's Degree in Economics at Simon Fraser University.

Joel Emes is a senior research economist at The Fraser Institute. He is a regular contributor to the Institute's monthly magazine, Fraser Forum, and co-author of Tax Facts Ten and Canada's All Government Debt (1996 edition). His articles have appeared in The Globe and Mail, the Calgary Herald, and the London Free Press. Mr. Emes is also the primary researcher for Tax Freedom Day and the Institute's Provincial and State/Provincial fiscal comparisons. He received his M.A. in Economics from Simon Fraser University in 1995.

Acknowledgments

The Fraser Institute wishes to thank The Donner Canadian Foundation for the financial assistance that made it possible for this study to be compiled and published. The first version of this study was compiled by Robin Richardson in 1994. The methodology and presentation were revised in 1996 by Jason Clemens, Joel Emes, and Michael Walker.

Preface

Governments in Canada spend approximately 21 percent of their total revenues servicing the public debt. Finance Minister Paul Martin's recent announcement on February 24, 1998 of a balanced budget means that for the first time in nearly 20 years the federal debt will not increase. Six of the provinces have announced balanced budgets for the coming fiscal year; all plan to be in balance by the year 2001. A constant or declining stock of debt and growing national income will release an increasing fraction of revenues from servicing debt and allow it to contribute to future budget surpluses. We face a future in which the impact of government debt upon the economy can be considerable reduced. For this optimistic future to be realized, it is essential that governments and taxpayers continue to support a regime of fiscally responsible conduct. There are constant pressures on governments to deviate from a course of fiscal propriety as the unlimited demand for government programs collides with a limited capacity to raise tax revenues.

The purpose of this report on the public liabilities of Canada is to provide Canadians with an accessible account of the total indebtedness of each of the provinces and of the federal government. It is a reminder of the extent of our indebtedness, how jurisdictions compare both nationally and internationally, and how the national comparisons are changing as time passes.

One of the most striking revelations of the compilation of total government liabilities is that the optimistic picture that can be constructed for the direct debt is not matched by the outlook for other liabilities and, in particular, for future program obligations. These obligations include the promises to pay Canada/Quebec Pension Plan (CPP/QPP) benefits, Old Age Security (OAS) pensions, and the medical care expenses of the population. While the direct debt of governments is beginning to decline as a fraction of our total national income, obligations are trending steadily upwards. There was a small drop in program obligations from 1996 to 1997, but these are the result of the recent reductions in the CPP/QPP unfunded liabilities, which more than offset the increased unfunded liabilities in Medicare and OAS.

Canadians are just beginning to recognize the significant challenge posed by these accumulating obligations and there are, as yet, no solutions proposed to deal with them. The recently enacted changes to the Canada Pension Plan (CPP) merely reduced the unfunded liability from $600 billion to $485 billion.

International comparisons help us to understand the true extent of our indebtedness; the only way to assess the seriousness of our indebtedness is to see how we rank compared with other countries. Certainly, that is how lenders assess country risk. In this report, we have carefully compiled statistics on the indebtedness of 138 countries against which Canada, the 10 provinces, and 2 territories can be compared. This comparison shows that Canada is among the most indebted countries of the world, both when compared to other affluent countries and to all countries.

This assessment of Canada's indebtedness demands caution, vigilance, and prudence. We must be cautious to ensure that we do not permit apathy to erode the recent gains in fiscal security. We must be vigilant that we do not assume new and larger obligations; we must be prudent in forming policies to deal with those that already exist.

Introduction

Although Canadian governments are generally bringing their annual budget deficits under control, excessive debt persists. In this Critical Issues Bulletin, we summarize the total debt and liabilities for the various levels of government in Canada and provide an international debt ranking for Canada and the provinces. The study shows that Canadian federal and provincial governments not only have large debt but also a large and growing stock of total liabilities. A liability can be either a debt or an obligation; in the context of government finance, the distinction between the two is critical. Governments must repay debts (e.g. the money owed to bondholders) or they default on their loans. Governments can eliminate or reduce obligations (e.g. the Canada Pension Plan) through statutory changes that cancel or reduce the coverage of programs. Obligations are not debt; they are promises to perform certain duties or pay a stream of benefits in the future. Throughout this study, liability refers to debt plus obligations.

This Critical Issues Bulletin contains four main sections:

• All Inclusive Government Liabilities consolidates the liabilities--direct debt, indirect debt, and program obligations--of the three levels of government in Canada (for ease of exposition, later reference to provincial governments will imply both provincial and territorial governments)
• Unfunded Liabilities of Government Programs discusses the unfunded liabilities of programs such as government employee pension plans, workers' compensation boards, retirement income support programs, and the health care system
• International Comparison compares the relative debt levels of 139 countries, the 10 provinces, and the two territories
• Recommendations provides a basic policy framework to resolve Canada's liability crisis.

The study also contains several appendices:

• Appendix A describes the methodology employed and data sources used in this study
• Appendix B and Appendix C provide detailed graphical and tabular presentations of the total liabilities of Canadian governments
• Appendix D gives the international debt ranking
• Appendix E is a list of readings that may be of interest.

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